fiscal q3 2016 - seagate technology€¦ · supplemental financial information fiscal q3 2016...

FISCAL Q3 2016SUPPLEMENTAL FINANCIAL INFORMATION

April 29, 2016

Supplemental Financial Information Fiscal Q3 2016 (quarter ended April 1, 2016) April 29, 2016

2

This document contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, each as

amended, including, in particular, statements about the Company’s plans, strategies and prospects and estimates of industry growth for the fiscal quarter ended July 1, 2016 and

beyond as well as our plans with respect to future dividend payments. These statements identify prospective information and may include words such as “expects,” “intends,” “plans,”

“anticipates,” “believes,” “estimates,” “predicts,” “projects” and similar expressions. These forward-looking statements are based on information available to the Company as of the

date of this document and are based on management’s current views and assumptions. These forward-looking statements are conditioned upon and also involve a number of known

and unknown risks, uncertainties, and other factors that could cause actual results, performance or events to differ materially from those anticipated by these forward-looking

statements. Such risks, uncertainties, and other factors may be beyond the Company’s control and may pose a risk to the Company’s operating and financial condition. Such risks

and uncertainties include, but are not limited to: the uncertainty in global economic conditions; the impact of the variable demand and adverse pricing environment for disk drives,

particularly in view of current business and economic conditions; the Company’s ability to successfully qualify, manufacture and sell its disk drive products in increasing volumes on a

cost-effective basis and with acceptable quality, particularly the new disk drive products with lower cost structures; the impact of competitive product announcements; currency

fluctuations that may impact the Company’s margins and international sales; possible excess industry supply with respect to particular disk drive products; disruptions to its supply

chain or production capabilities; unexpected advances in competing technologies; the development and introduction of products based on new technologies and expansion into new

data storage markets; our ability to comply with certain covenants in our credit facilities with respect to financial ratios and financial condition tests; cyber-attacks or other data

breaches that disrupt its operations or results in the dissemination of proprietary or confidential information; and the Company’s ability to achieve projected cost savings in connection

with restructuring plans and fluctuations in interest rates. Information concerning risks, uncertainties and other factors that could cause results to differ materially from the

expectations described in this report is contained in the Company’s Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission on August 11, 2015, the

“Risk Factors” section of which is incorporated into this report by reference, and other documents filed with or furnished to the Securities and Exchange Commission. These forward-

looking statements should not be relied upon as representing the Company’s views as of any subsequent date and the Company undertakes no obligation to update forward-looking

statements to reflect events or circumstances after the date they were made.

Safe Harbor Statement


3

To supplement the condensed consolidated financial statements presented in accordance with generally accepted accounting principles (GAAP), the Company provides non-GAAP

measures of revenue, net income, diluted earnings per share, earnings per share, gross margin, gross margin as a percentage of revenue, operating expenses, free cash flow, and

EBITDA which are adjusted from results based on GAAP to exclude certain expenses, gains and losses. These non-GAAP financial measures are provided to enhance the user's

overall understanding of the Company’s current financial performance and our prospects for the future. Specifically, the Company believes non-GAAP results provide useful

information to both management and investors as these non-GAAP results exclude certain expenses, gains and losses that we believe are not indicative of our core operating results

and because it is consistent with the financial models and estimates published by financial analysts who follow the Company. Free cash flow does not reflect all of the Company's

expenses and non-cash items and does not reflect the Company's uses of cash in financing and investment activities.

These non-GAAP results are some of the primary measurements management uses to assess the Company’s performance, allocate resources and plan for future periods. Reported

non-GAAP results should only be considered as supplemental to results prepared in accordance with GAAP, and not considered as a substitute for, or superior to, GAAP results.

These non-GAAP measures may differ from the non-GAAP measures reported by other companies in our industry.

Use of Non-GAAP Financial Information


4

Revenue of $2.6 billion

Non-GAAP operating expense of $439 million, reduced 21% year-over-year

Paid quarterly cash dividend of $0.63 per share, increased 17% year-over-year

Returned $1.6 billion to shareholders in the form of dividends and share redemptions YTD

Shipped 55.6 exabytes, grew 2% year-over-year; shipped 19.9 exabytes in Enterprise, grew

16% year-over-year

Average capacity per drive of 1,417 GB, grew 30% year-over-year

Financial Highlights


5

Announced it is now shipping in volume its 10TB helium enterprise drives— the Seagate® Enterprise Capacity 3.5 HDD.

Launched the world’s first 8TB surveillance HDD, Seagate® Surveillance HDD, the largest drive of its kind for surveillance applications in the

industry.

Launched the Seagate® NAS HDD 8TB, the highest-capacity drive optimized for RAID, NAS and server storage.

Shipping the world’s first 2TB, 7mm HDD — the Seagate® Mobile HDD. This ultra-high capacity mobile hard drive is the lightest, fastest and

most power efficient 7mm drive in the industry, enabling a richer and more rewarding experience for users without compromising demand for

laptops that are slim, light, and powerful.

Announced the launch of Seagate® Innov8™, the world’s first USB-powered desktop hard drive. Seagate Innov8 features innovation from

the inside out with its industry-leading 8TB capacity, trend-setting Ignition Boost Technology and expressive design.

Unveiled a production-ready unit of the fastest single SSD demonstrated to date, with throughput performance of 10 GB/s. The 10GB/s unit,

which is expected to be released this summer, is more than 4GB/s faster than the previous fastest-industry SSD on the market. It also meets

the OCP storage specifications being driven by Facebook, which will help reduce the power and cost burdens traditionally associated with

operating at this level of performance.

Announced it will incorporate Intel Enterprise Edition for Lustre® (IEEL), a big data software platform, into its market-leading

ClusterStor® storage architecture for high-performance computing (HPC).

Signed a Cooperative Research and Development Agreement with Los Alamos National Laboratory aimed at determining innovative new

ways to keep massive amounts of stored data available for rapid access, while also minimizing power consumption and improving the quality

of data-driven research. Seagate and Los Alamos are working together on power-managed disk and software solutions for deep data

archiving, which represents one of the biggest challenges faced by organizations that must juggle increasingly massive amounts of data

using very little additional energy.

Product and Technology Development Highlights


61. See ‘GAAP to Non-GAAP Reconciliations’ slide for GAAP reconciliation.

2. In Q2’15, Statement of Operations includes the impact of the final award amount of $630 million, less litigation and other related costs of $10 million, related to the arbitration award in the Company’s case against Western Digital for the misappropriation of the Company’s trade secrets.

3. The number of shares used in the Non-GAAP diluted net income per share computation for Q3'16 is 299 million as it includes dilutive shares related to employee equity award plans. Such shares were excluded from the computation of GAAP diluted net income per share as to do so would be anti-dilutive.

Quarterly Financial TrendsQ3’14 Q4’14 Q1’15 Q2’152 Q3’15 Q4’15 Q1’16 Q2’16 Q3’16

Revenue ($M) 3,406 3,301 3,785 3,696 3,330 2,927 2,925 2,986 2,595

Gross Margin % 28.2% 28.0% 27.8% 27.8% 28.7% 26.5% 23.6% 24.8% 20.2%

Operating Expenses ($M) 515 515 595 (26) 612 570 603 512 497

Net Income (loss) ($M) 395 320 381 933 291 138 34 165 (21)

Diluted EPS (LPS) $1.17 $0.95 $1.13 $2.78 $0.88 $0.43 $0.11 $0.55 ($0.07)

Non-GAAP Results1

Revenue ($M) 3,406 3,301 3,785 3,696 3,330 2,927 2,927 2,985 2,591

Gross Margin % 28.5% 28.5% 28.1% 28.2% 28.9% 27.2% 24.2% 25.6% 22.7%

Operating Expenses ($M) 470 509 550 546 555 515 501 453 439

Net Income ($M) 453 370 453 452 357 250 165 246 66

Diluted EPS3 $1.34 $1.10 $1.34 $1.35 $1.08 $0.77 $0.54 $0.82 $0.22

End of Qtr Actual Share Count (M) 326 327 327 329 318 315 299 296 298

Diluted Shares O/S for EPS (M) 338 337 337 336 330 323 308 301 298

Dividend Per Share Paid $0.43 $0.43 $0.43 $0.54 $0.54 $0.54 $0.54 $0.63 $0.63

Shares Repurchased (M) 4 0.5 3 0.3 12 3.2 20 2.9 -

Fiscal YTD Shares Repurchased (M) 41 41 3 3 15.3 18.5 20 22.9 22.9

Revenue by Product Line ($M)

HDD 3,363 3,144 3,582 3,470 3,102 2,713 2,716 2,727 2,371

Enterprise Systems, Flash, and Other 43 157 203 226 228 214 209 259 224


7

Non-GAAP: Revenue and Gross Margin

$3,406 $3,301 $3,785 $3,696 $3,330 $2,927 $2,927 $2,985 $2,591

28.5% 28.5% 28.1% 28.2%28.9%

27.2%

24.2%

25.6%

22.7%

15.0%

20.0%

25.0%

30.0%

35.0%

2,000

2,500

3,000

3,500

4,000

4,500

Q3'14 Q4'14 Q1'15 Q2'15 Q3'15 Q4'15 Q1'16 Q2'16 Q3'16

$ in

Millio

ns

Non-GAAP Revenue ($M) Non-GAAP Gross Margin


8

Product Mix TrendsQ3’14 Q4’14 Q1’15 Q2’15 Q3’15 Q4’15 Q1’16 Q2’16 Q3’16

Enterprise

Capacity (EB) 10.6 10.6 14.7 16.7 17.1 15.5 14.6 17.7 19.9Mission Critical 1.8 1.9 2.1 2.4 2.5 2.4 2.4 2.6 2.2

Nearline 8.8 8.7 12.5 14.3 14.6 13.2 12.2 15.1 17.7

Units (M) 7.7 7.2 8.6 9.0 9.0 8.1 7.6 8.1 7.7

Mission Critical 3.8 3.5 3.9 4.0 4.3 3.7 3.7 3.7 3.2

Nearline 3.9 3.7 4.7 5.0 4.7 4.4 3.9 4.4 4.5

Average Capacity per Drive (GB) 1,382 1,467 1,706 1,896 1,957 1,936 1,925 2,188 2,592

Mission Critical 481 531 543 578 588 631 650 691 687

Nearline 2,256 2,395 2,679 2,923 3,152 3,048 3,119 3,452 3,941

Client Compute

Units (M) 36.2 35.2 38.9 35.7 31.1 26.6 28.8 25.3 21.4Desktop 19.8 18.4 18.7 16.0 14.3 11.9 12.4 11.7 10.8

Notebook 16.4 16.8 20.2 19.7 16.8 14.6 16.4 13.6 10.6

Non-Compute

Units (M) 11.3 9.9 11.8 12.1 9.9 10.5 10.7 12.5 10.1Consumer Electronics 5.4 5.1 6.0 6.1 4.8 5.8 5.5 6.2 5.0

Branded 5.9 4.8 5.7 6.0 5.1 4.7 5.2 6.3 5.2

Total HDD Capacity (EB) 50.8 49.0 59.5 60.7 54.6 51.7 55.2 60.6 55.6

Total HDD Units (M) 55.2 52.3 59.3 56.8 50.0 45.2 47.1 45.9 39.2

Average Capacity per Drive (GB) 920 937 1,003 1,069 1,092 1,144 1,172 1,320 1,417

Revenue by Channel

OEM 66% 70% 70% 69% 70% 73% 70% 69% 69%

Distributors 20% 19% 18% 18% 18% 15% 18% 16% 16%

Retail 14% 11% 12% 13% 12% 12% 12% 15% 15%

NOTE: Minor calculation variances maybe due to rounding.


9

Exabytes Shipped and Average Capacity per Drive

50.8 49.0 59.5 60.7 54.6 51.7 55.2 60.6 55.6

1,417 GB

500

600

700

800

900

1000

1100

1200

1300

1400

1500

30.0

35.0

40.0

45.0

50.0

55.0

60.0

65.0

70.0

Q3'14 Q4'14 Q1'15 Q2'15 Q3'15 Q4'15 Q1'16 Q2'16 Q3'16

Avera

ge G

B p

er d

rive

Exab

yte

s

STX Exabyte Shipped Average capacity per drive (GB)


10

1. Beginning Q1’16, restricted cash is no longer included. Prior to Q1’16, the balance includes cash, cash equivalents, restricted cash and short term investments.

2. Cash paid for the acquisition of property, equipment, and leasehold improvements.

3. Free cash flow is a non-GAAP measure defined as cash flow from operations less capital expenditures.

4. Based on Fiscal Year.

5. In Q2’15, Cash flow amounts include the impact of the final award amount of $630 million, less litigation and other related costs of $10 million, related to the arbitration award in the Company’s case against Western Digital for the misappropriation of the Company’s trade secrets.

6. Based on Fiscal Year. For YTD Shares Repurchased through Fiscal Q2’16, $1,061 million was paid in cash and $29 million was accrued for as of January 1, 2016.

NOTE: Minor calculation variances maybe due to rounding.

Cash Flow and Operational TrendsQ3’14 Q4’14 Q1’15 Q2’155 Q3’15 Q4’15 Q1’16 Q2’16 Q3’16

Cash1 ($M) 2,310 2,658 2,205 3,306 2,614 2,492 1,921 1,264 1,199

Debt ($M) 3,514 3,920 3,809 3,932 3,931 4,155 4,140 4,140 4,130

Cash Flow From Operations ($M) 443 577 602 1,443 374 228 824 382 205

Capital Expenditures2 ($M) 124 131 172 215 159 201 209 137 95

Free Cash Flow3 ($M) 319 446 430 1,228 215 27 615 245 110

YTD Cash Flow From Operations4 ($M) 1,981 2,558 602 2,045 2,419 2,647 824 1,206 1,411

YTD Shares Repurchased6 ($M) 1,886 1,912 183 201 907 1,087 983 1,090 1,090

YTD Dividends4 ($M) 417 557 140 317 493 664 163 351 539

YTD Percent Return of OCF4 116% 97% 54% 25% 58% 66% 139% 119% 115%

Days Sales Outstanding 44 48 49 45 48 54 47 43 44

Days Inventory Outstanding 31 38 38 38 42 42 45 43 41

Days Payables Outstanding 50 60 62 59 65 64 77 71 66

Cash Conversion Cycle 25 26 25 24 25 32 15 14 19

Worldwide Headcount 51,099 52,594 54,049 54,840 53,602 52,346 51,079 50,048 46,673


11

$0.43 $0.43 $0.43 $0.54 $0.54 $0.54 $0.54 $0.63 $0.63$0.20

$0.25

$0.30

$0.35

$0.40

$0.45

$0.50

$0.55

$0.60

$0.65

$0.70

Q3'14 Q4'14 Q1'15 Q2'15 Q3'15 Q4'15 Q1'16 Q2'16 Q3'16

Dividend per Share Paid History

17%

26%


121. Total interest rate represents the weighted average interest rate.

Long Term Debt Profile

Facility Rate Due Par Value $M Book Value $M

Senior Notes 3.75% November 2018 $800 $800

Senior Notes 7.00% November 2021 $158 $158

Senior Notes 4.75% June 2023 $990 $990

Senior Notes 4.75% January 2025 $995 $995

Senior Notes 4.875% June 2027 $700 $698

Senior Notes 5.75% December 2034 $490 $489

Total 4.78%1 $4,133 $4,130


131. See ‘GAAP to Adjusted EBITDA Reconciliations’ slide for reconciliation of net income to adjusted EBITDA.

Long Term Debt Profile

$3,514 $3,920 $3,809 $3,934 $3,933 $4,158 $4,143 $4,143 $4,133

1.2x

1.4x 1.3x1.4x

1.4x

1.6x

1.9x

2.0x

2.4x

0.3x

0.6x

0.9x

1.2x

1.5x

1.8x

2.1x

2.4x

$2,000

$2,500

$3,000

$3,500

$4,000

$4,500

$5,000

Q3'14 Q4'14 Q1'15 Q2'15 Q3'15 Q4'15 Q1'16 Q2'16 Q3'16

Long Term Debt (Par Value) Debt (Book Value)-to-LTM Credit Agreement Defined EBITDA1


14

FY10 FY15 5-Year CAGR

Exabytes Shipped 80 228 23%

Nearline Exabytes Shipped 6 57 57%

HDD Units Shipped 193 M 212 M 2%

Average Capacity Per Drive 0.4 TB 1.1 TB 22%

Revenue $11.4 B $13.7 B 4%

Cloud/New Storage Applications % of Revenue 47% 59%

Non-GAAP Gross Margin % 28% 28%

Non-GAAP Earnings Per Share $3.35 $4.57 6%

Diluted Shares O/S 514 M 331 M

Operating Cash Flow $1.9 B $2.6 B 6%

Capital Expenditures $639 M $747 M 3%

Note: Cloud and New Storage Applications is total revenue less desktop and notebook.

Long Term Financial Results


151. The number of shares used in the Non-GAAP diluted net income per share computation for Q3'16 is 299 million as it includes dilutive shares related to employee equity award plans. Such shares were excluded from the computation of GAAP diluted net income per share as to do so would be anti-dilutive.

GAAP to Non-GAAP Reconciliations($ Millions) Q3’14 Q4’14 Q1’15 Q2’15 Q3’15 Q4’15 Q1’16 Q2’16 Q3’16

GAAP net income (loss) $395 $320 $381 $933 $291 $138 $34 $165 ($21)

Non-GAAP adjustments

A. Revenue - - - - - - 2 (1) (4)

B. Cost of revenue 11 14 12 14 8 19 17 23 67

C. Product development 0 0 4 6 4 2 6 3 2

C. Marketing and administrative 17 (25) 4 7 7 12 4 10 9

D. Amortization of intangibles 26 27 31 32 32 32 33 29 27

E. Restructuring and other, net 2 4 6 3 14 9 59 17 20

F. Gain on arbitration award, net - - - (620) - - - - -

G. Other income (expense), net 2 76 15 (104) 1 17 10 - (34)

H. Provision for (benefit from) income taxes 0 (46) 0 181 - 21 - - -

Non-GAAP net income $453 $370 $453 $452 $357 $250 $165 $246 $66

Diluted net income (loss) per share:

GAAP $1.17 $0.95 $1.13 $2.78 $0.88 $0.43 $0.11 $0.55 ($0.07)

Non-GAAP $1.34 $1.10 $1.34 $1.35 $1.08 $0.77 $0.54 $0.82 $0.22

Shares used in diluted net income (loss)

share calculation1338 337 337 336 330 323 308 301 298

A. Revenue has been adjusted on a non-GAAP basis to exclude sales return provision for certain products that will be discontinued and revenue associated with our disposed data services business.

B. Cost of revenue has been adjusted on a non-GAAP basis to exclude amortization of intangibles associated with acquisitions, recognition of certain terminated contracts, other acquisition related expenses, and write off of certain fixed assets and discontinued inventory.

C. Product development and Marketing and administrative expense has been adjusted on a non-GAAP basis to exclude the write off of certain fixed assets, the impact of integration costs associated with acquisitions, and marketing and administrative expenses of our disposed data services business.

D. Amortization of intangibles primarily related to our acquisitions has been excluded on a non-GAAP basis.

E. Restructuring and other, net, primarily related to a reduction in our work force as a result of our ongoing focus on cost efficiencies in all areas of our business, has been excluded on a non-GAAP basis.

F. In Q2’15, Gain on arbitration award, net, has been adjusted on a non-GAAP basis to exclude the final award amount of $630 million, less litigation and other related costs of $10 million, related to the arbitration award in the Company’s case against Western Digital for the misappropriation of the Company’s trade secrets.

G. Other income (expense), net, has been adjusted on a non-GAAP basis to exclude the payment of the unpaid interest of $33 million on the final arbitration award amount in the Company's case against Western Digital, the net impact of gains recognized on the early repurchase of debt, and the impairment of certain strategic investments.

H. In Q2’15, Provision for (benefit from) income taxes, has been adjusted on a non-GAAP basis primarily to exclude the net tax expense associated with the final audit assessment from the Jiangsu Province State Tax Bureau of the People's Republic of China for changes to the Company's tax filings for the calendar years 2007 through 2013 and

excludes tax items related to the release of valuation allowance on U.S. deferred tax assets associated with increases in the Company's forecasted U.S. taxable income.

Non-GAAP gross margin and Non-GAAP gross margin %: Non-GAAP gross margin is defined as Revenue less Cost of revenue less non-GAAP adjustments to Revenue and Cost of revenue. Non-GAAP gross margin % is defined as Non-GAAP gross margin divided by Non-GAAP Revenue.

Non-GAAP operating expenses, Non-GAAP operating income and Non-GAAP operating margin: Non-GAAP operating expenses is defined as Product development, Marketing and administrative, Amortization of intangibles, Restructuring and other, net and Gain on arbitration award, net adjusted for non-GAAP items C through F noted in the table above.

Non-GAAP operating income is defined as Income from operations adjusted for non-GAAP items A through F noted in the table above. Non-GAAP operating margin is non-GAAP operating income divided by Non-GAAP Revenue.


161. Credit Agreement Defined EBITDA includes the adjustment for expense related to stock compensation.

GAAP to Adjusted EBITDA Reconciliations($ Millions) Q3’14 Q4’14 Q1’15 Q2’15 Q3’15 Q4’15 Q1’16 Q2’16 Q3’16

Income Before Income Taxes $390 $284 $392 $1,126 $304 $149 $31 $180 $9

EBITDA adjustments

Depreciation 185 183 184 169 164 172 167 163 155

Amortization 26 28 34 39 39 40 41 46 43

Interest Income (1) (1) (1) (1) (1) (2) (1) (1) (1)

Interest Expense 52 50 54 50 48 55 47 48 47

EBITDA $652 $544 $663 $1,383 $554 $414 $285 $436 $253

Non-GAAP adjustments

A. Revenue - - - - - - 2 (1) (4)

B. Cost of Revenue 11 14 9 7 1 12 10 8 52

C. Product Development 0 0 4 6 4 2 6 3 2

C. Marketing and administrative 17 (25) 4 7 7 12 4 10 9

D. Restructuring and other, net 2 4 6 3 14 9 59 17 20

E. Gain on arbitration award, net - - - (620) - - - - -

F. Other income (expense), net 2 76 15 (104) 1 17 10 - (34)

Adjusted EBITDA $684 $613 $701 $682 $581 $466 $376 $473 $298

Stock Compensation Expense ($M) 30 31 42 31 33 31 33 32 30

Credit Agreement Defined EBITDA1 $714 $644 $743 $713 $614 $497 $409 $505 $328

A. Revenue has been adjusted on a non-GAAP basis to exclude sales return provision for certain products that will be discontinued and revenue associated with our disposed data services business.

B. Cost of revenue has been adjusted on a non-GAAP basis to exclude recognition of certain terminated contracts, other acquisition related expenses, and write off of certain fixed assets and discontinued inventory.

C. Product development and Marketing and administrative expense has been adjusted on a non-GAAP basis to exclude the write off of certain fixed assets, the impact of integration costs associated with acquisitions, and marketing and administrative expenses of our disposed data services business.

D. Restructuring and other, net, primarily related to a reduction in our work force as a result of our ongoing focus on cost efficiencies in all areas of our business, has been excluded on a non-GAAP basis.

E. In Q2’15, Gain on arbitration award, net, has been adjusted on a non-GAAP basis to exclude the final award amount of $630 million, less litigation and other related costs of $10 million, related to the arbitration award in the Company’s case against Western Digital for the misappropriation of the Company’s trade secrets.

F. Other income (expense), net, has been adjusted on a non-GAAP basis to exclude the payment of the unpaid interest of $33 million on the final arbitration award amount in the Company's case against Western Digital, the net impact of gains recognized on the early repurchase of debt, and the impairment of certain strategic investments.

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fiscal q3 2016 - seagate technology€¦ · supplemental financial information fiscal q3 2016...

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